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Santa Fe Gold CORP - Quarter Report: 2012 September (Form 10-Q)

Santa Fe Gold Corp.: Form 10-Q - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _____ to _______

Commission File Number: 001-12974

SANTA FE GOLD CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 84-1094315
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1128 Pennsylvania NE, Suite 200, Albuquerque, NM 87110
(Address of principal executive offices)(Zip Code)

Registrant's telephone number including area code: (505) 255-4852

N/A
Former name, former address, and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]     No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:

Larger accelerated filer [   ] Accelerated filer [X]
Non-accelerated filer [   ] Smaller reporting company [   ]
(Do not check if a smaller reporting company)  

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]     No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
117,537,970 shares outstanding as of November 9, 2012.


SANTA FE GOLD CORPORATION
INDEX TO FORM 10-Q

PART I
FINANCIAL INFORMATION

    Page
 Item 1. Financial Statements 3
  Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and June 30, 2012 4
Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended September 30, 2012 and 2011 (Unaudited) 5
Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2012 and 2011 (Unaudited) 6
  Notes to the Unaudited Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 28

PART II
OTHER INFORMATION

Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 29
Item 6. Exhibits 29
SIGNATURES 30
CERTIFICATIONS  

2


PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

3


SANTA FE GOLD CORPORATION
CONSOLIDATED BALANCE SHEETS

    September 30,     June 30,  
  2012     2012  
    (Unaudited)        
ASSETS  
CURRENT ASSETS:            
       Cash and cash equivalents $  261,566   $  614,385  
       Accounts receivable   5,300,378     2,442,399  
       Inventory   851,976     951,458  
       Marketable securities   50,821     48,776  
       Prepaid expenses and other current assets   380,768     329,466  
                               Total Current Assets   6,845,509     4,386,484  
MINERAL PROPERTIES   579,000     579,000  
             
PROPERTY, EQUIPMENT, AND MINE DEVELOPMENT, net   23,310,054     24,139,166  
             
OTHER ASSETS:            
       Idle equipment, net   1,223,528     1,223,528  
       Restricted cash   231,716     231,716  
       Deferred financing costs, net   1,064,489     1,102,070  
                               Total Other Assets   2,519,733     2,557,314  
       Total Assets $  33,254,296   $  31,661,964  
             
LIABILITIES AND STOCKHOLDERS' EQUITY    
CURRENT LIABILITIES:            
       Accounts payable $  2,248,170   $  2,199,026  
       Accrued liabilities   4,218,850     2,505,785  
       Derivative instrument liabilities   2,922,997     1,026,765  
       Current portion, notes payable   9,686,747     9,931,468  
       Curent portion,senior subordinated convertible notes payable, net of discount of 
              $1,703 and $5,564, respectively
  448,297     444,436  
       Current portion, capital leases   34,877     41,487  
       Completion guarantee payable   3,359,873     3,359,873  
                               Total Current Liabilities   22,919,811     19,508,840  
LONG TERM LIABILITIES:            
       Notes payable, net of current portion   450,566     936,996  
       Capital leases, net of current portion   -     3,545  
       Asset retirement obligation   161,779     159,048  
                               Total Liabilities   23,532,156     20,608,429  
STOCKHOLDERS' EQUITY :            
       Common stock, $.002 par value, 300,000,000 shares authorized; 117,537,970 and 
              111,143,684 shares issued and outstanding, respectively
  235,076     222,287  
       Additional paid in capital   75,923,010     74,846,754  
       Accumulated (deficit)   (66,388,709 )   (63,966,224 )
       Accumulated other comprehensive (loss)   (47,237 )   (49,282 )
                               Total Stockholders' Equity   9,722,140     11,053,535  
       Total Liabilities and Stockholders' Equity $  33,254,296   $  31,661,964  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

4


SANTA FE GOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)

    Three Months Ended  
    September 30,  
    2012     2011  
SALES, net $  5,880,297   $  2,550,724  
             
OPERATING COSTS AND EXPENSES:            
       Costs applicable to sales   4,435,856     1,620,490  
       Exploration, other mine and mill costs   595,817     528,954  
       General and administrative   774,042     963,124  
       Depreciation and amortization   1,085,344     658,407  
       Accretion of asset retirement obligation   2,731     2,127  
                 Total Operating Costs and Expenses   6,893,790     3,773,102  
LOSS FROM OPERATIONS   (1,013,493 )   (1,222,378 )
             
OTHER INCOME (EXPENSE):            
       Interest income   -     2,749  
       (Loss) gain on derivative instrument liabilities   (852,132 )   2,887,760  
       Accretion of discounts on notes payable   (3,861 )   (553,846 )
       Interest expense   (552,999 )   (411,423 )
                 Total Other (Expense) Income   (1,408,992 )   1,925,240  
             
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES   (2,422,485 )   702,862  
PROVISION FOR INCOME TAXES   -     -  
             
NET (LOSS) INCOME   (2,422,485 )   702,862  
OTHER COMPREHENSIVE INCOME            
       Unrealized gain on marketable securities   2,045     31,181  
NET COMPREHENSIVE (LOSS) INCOME $  (2,420,440 ) $  734,043  
             
Basic and Diluted Per Share data            
       Net (Loss) Income - basic and diluted $  (0.02 ) $  0.01  
             
Weighted Average Common Shares Outstanding:            
       Basic and diluted   114,294,150     94,556,912  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

5


SANTA FE GOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

    Three Months Ended  
    September 30,  
    2012     2011  
CASH FLOWS FROM OPERATING ACTIVITIES:            
     Net (loss) income $  (2,422,485 ) $  702,862  
     Adjustments to reconcile net (loss) income to net cash used in operating activities:        
               Depreciation and amortization   1,085,344     658,407  
               Stock-based compensation   259,884     312,791  
               Accretion of discount on notes payable   3,861     553,846  
               Accretion of asset retirement obligation   2,731     2,127  
               Loss (gain) on derivative instrument liabilities   852,132     (2,887,760 )
               Loss on disposal of assets   -     152,587  
               Amortization of deferred financing costs   37,581     99,579  
     Net change in operating assets and liabilities:            
               Accounts receivable   (2,857,979 )   175,750  
               Inventory   99,482     (111,545 )
               Prepaid expenses and other current assets   (51,302 )   (154,789 )
               Accounts payable and accrued liabilities   1,762,209     (897,183 )
               Deferred revenue   -     (451,654 )
                               Net Cash Used in Operating Activities   (1,228,542 )   (1,844,982 )
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
     Decrease to restricted cash   -     128,658  
     Proceeds from disposal of assets   -     25,000  
     Notes receivable and accrued interest   -     (2,045 )
     Additions of property, equipment, and mine development   (256,232 )   (158,185 )
     Construction in progress   -     (1,315,417 )
                               Net Cash Used in Investing Activities   (256,232 )   (1,321,989 )
CASH FLOWS FROM FINANCING ACTIVITIES:            
     Advances towards contemplated acquistion of entity   -     (213,716 )
     Proceeds from issuance of stock   1,873,261     -  
     Proceeds from notes payable   -     5,105,121  
     Payments on notes payable   (731,151 )   (73,804 )
     Payments on capital leases   (10,155 )   (35,722 )
     Payment of financing costs   -     (495,000 )
                               Net Cash Provided by Financing Activities   1,131,955     4,286,879  
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   (352,819 )   1,119,908  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   614,385     172,531  
CASH AND CASH EQUIVALENTS, END OF PERIOD $  261,566   $  1,292,439  
             
SUPPLEMENTAL CASH FLOW INFORMATION:            
     Cash paid for interest $  247,599   $  323,898  
     Cash paid for income taxes $  -   $  -  
             
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
     Stock issued for services $  39,000   $  48,000  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

6


SANTA FE GOLD CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

     Santa Fe Gold Corporation (the Company) is a U.S. mining company incorporated in Delaware in August 1991. Its general business strategy is to acquire, explore and develop mineral properties. The Company’s principal assets are the 100% owned Summit silver-gold project in New Mexico, the leased Ortiz gold property in New Mexico, and the 100% owned Black Canyon mica project in Arizona.

     The unaudited interim consolidated financial statements of the Company included herein have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q under Article 8.03 of Regulation S-X. These statements do not include all of the information and notes to the financial statements required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended September 30, 2012, are not necessarily indicative of the results that may be expected for our fiscal year ending June 30, 2013. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2012, included in the Company’s Annual Report on Form 10-K, as filed with Securities and Exchange Commission.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Going Concern

     The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due.

     The Company had a net loss of $2,422,485 for the three months ended September 30, 2012, has a working capital deficit of $16,074,302 and has a total accumulated deficit of $66,388,709 at September 30, 2012. The Company generated revenues of $5,880,297 from the sales of precious metals in the three months ended September 30, 2012. To continue as a going concern, the Company is dependent on continued fund raising for project development and payment of operating and financing expenses until production at the Summit mine site attains cash flow to cover the Company’s costs. The Company has no continuing commitment from any party to provide additional working capital and there is no assurance that such funding will be available if needed, or if available, that its terms will be favorable or acceptable to the Company.

     The Company’s consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Principles of Consolidation

     The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Azco Mica, Inc., a Delaware corporation; The Lordsburg Mining Company, a New Mexico corporation; Minera Sandia, S.A. de C.V., a Mexican corporation and Santa Fe Gold Barbados Corporation, a Barbados corporation. All significant inter-company accounts and transactions have been eliminated in consolidation.

7


Estimates

     The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates under different assumptions or conditions.

     Significant estimates are used when accounting for the Company’s carrying value of mineral properties, fixed assets, depreciation and amortization, accruals, derivative instrument liabilities, taxes and contingencies, asset retirement obligations, revenue recognition, and stock-based compensation which are discussed in the respective notes to the consolidated financial statements.

Cash and Cash Equivalents

     The Company considers all liquid investments purchased with an initial maturity of three months or less to be cash equivalents. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash balances. Restricted cash is excluded from cash and cash equivalents and is included in other assets.

Accounts Receivable

     Accounts receivable consist of trade receivables from precious metals sales of concentrate, flux, and refined gold. In evaluating the collectability of accounts receivable, the Company analyzes past results and identifies trends for each major payer source of revenue for the purpose of estimating an allowance for doubtful accounts. Data in each major payer source are regularly reviewed to evaluate the adequacy of the allowance, and actual write-offs are charged against the allowance. There was no allowance for doubtful accounts as of September 30, 2012, and June 30, 2011.

Inventory

     Major types of inventories include ore stockpile inventories, in-process inventories, siliceous flux material inventories and concentrate inventories, as described below. Inventories are carried at the lower of average cost or net realizable value. The net realizable value of ore stockpile inventories and in-process inventories represents the estimated future sales price of the product based on current and future metals prices, less the estimated costs to complete production and bring the product to sale. Concentrate inventories and siliceous flux material inventories are carried at the lower of full cost of production or net realizable value based on current and future metals prices. Write-downs of inventory are reported as a component of costs applicable to sales.

     Ore Stockpile Inventories: Ore stockpile inventories represent mineralized materials that have been mined and are available for further processing. Costs are allocated to ore stockpile inventories based on relative values of material stockpiled and processed using current mining costs incurred up to the point of stockpiling the ore, including applicable overhead, depreciation, and amortization. Material is removed from the stockpile at an average cost per ton. The current portion of ore stockpiles is determined based on the expected amounts to be processed within the next 12 months. Ore stockpile inventories not expected to be processed within the next 12 months, if any, are classified as long-term.

     In-process Inventories: In-process inventories represent materials that are currently in the process of being converted to a saleable product. In-process inventories are valued at the lower of average cost or net realizable value of the material fed into the process attributable to the source material plus the in-process conversion costs, including applicable depreciation relating to the process facilities incurred to that point in the process.

     Siliceous Flux Material Inventories: The siliceous flux material inventories represent ore stockpiles that have been crushed and screened to the customer’s specifications, and represent a saleable product.

     Concentrate Inventories: Concentrates inventories include metal concentrates located either at the Company’s facilities or in transit to the customer’s port. Inventories consist of gold and silver metal concentrates and represent a saleable product.

8


Marketable Securities

     Marketable securities are classified as available for sale and classified as current assets as they are subject to use within one year. The marketable securities are carried at fair value with unrealized gains and losses, if any, included as a component of accumulated other comprehensive income (loss) in stockholders’ equity.

Mineral Properties

     Mineral properties are capitalized at their fair value at the acquisition date, either as an individual asset purchase or as part of a business combination. When it is determined that a mineral property can be economically developed as a result of establishing reserves, subsequent mine development are capitalized and are amortized using the “Units of Production” method over the estimated life of the ore body based on estimated recoverable ounces in proven and probable reserves.

     The Company’s mineral rights generally are enforceable regardless of whether proven and probable reserves have been established. The Company has the ability and intent to renew mineral interests where the existing term is not sufficient to recover all identified and valued proven and probable reserves and/or undeveloped mineralized material.

Property, Equipment and Mine Development

          Property and Equipment

     Property and equipment are carried at cost. Maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. Expenditures for new property or equipment and expenditures that extend the useful lives of existing property and equipment are capitalized and recorded at cost. Upon retirement, sale or other disposition, the cost and accumulated amortization are eliminated and the gain or loss is included in operations. Depreciation is taken over the estimated useful lives of the assets using the straight-line method. The estimated useful lives of property and equipment is shown below. Land is not depreciated.

  Estimated Useful
  Life
Leasehold improvements 3 Years
Office furniture and equipment 3 Years
Mine processing equipment and buildings 7 – 20 Years
Plant 3 – 9 Years
Tailings 3 Years
Environmental and permits 7 Years
Asset retirement obligation 5 Years
Automotive 3 – 5 Years
Software 5 Years

          Mine Development

     Mine development costs include engineering and metallurgical studies, drilling and other related costs to delineate an ore body, and the building of access ways, shafts, lateral access, drifts, ramps and other infrastructure in an underground mine. Costs incurred before mineralization is classified as proven and probable reserves are expensed and classified as exploration expense. Capitalization of mine development project costs, that meet the definition of an asset, begins once mineralization is classified as proven and probable reserves.

     Drilling and related costs are capitalized for an ore body where proven and probable reserves exist and the activities are directed at obtaining additional information on the ore body or converting non-reserve mineralization to proven and probable reserves. All other drilling and related costs are expensed as incurred. Drilling costs incurred during the production phase for operational ore control are allocated to inventory costs and then included as a component of Costs applicable to sales.

9


     Mine development is amortized using the units-of-production method based upon estimated recoverable ounces in proven and probable reserves. To the extent that these costs benefit an entire ore body, they are amortized over the estimated life of the ore body. Costs incurred to access specific ore blocks or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific ore body.

Idle Equipment

     The Company has certain idle equipment in storage related primarily to the Black Canyon project. The equipment’s carrying value totaled $1,223,528 as of September 30, 2012, and June 30, 2011. The Company evaluates the carrying value of the idle equipment when events or changes in circumstances indicate the related carrying amount may not be recoverable. The Company has not recorded any impairment during the three months ended September 30, 2012.

Fair Value Measurements

     The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximated their related fair values as of September 30, 2012 and June 30, 2012, due to the relatively short-term nature of these instruments. The carrying value of the Company’s convertible debentures approximates the fair value based on the terms at which the Company could obtain similar financing and the short term nature of these instruments.

Impairment of Long-Lived Assets

     The Company reviews and evaluates long-lived assets for impairment when events or changes in circumstances indicate the related carrying amounts may not be recoverable. The assets are subject to impairment consideration if events or circumstances indicate that their carrying amount might not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. When impairment is identified, the carrying amount of the asset is reduced to its estimated fair value which is generally derived from estimated discounted cash flows. As of September 30, 2012, exploration progress is on target with the Company’s exploration and evaluation plan and no events or circumstances have happened to indicate the related carrying values of long-lived assets may not be recoverable.

Derivative Financial Instruments

     The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.

     The Company reviews the terms of convertible debt, equity instruments and other financing arrangements to determine whether there are embedded derivative instruments, including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative financial instrument. Also, in connection with the issuance of financing instruments, the Company may issue freestanding options or warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity. The Company may also issue options or warrants to non-employees in connection with consulting or other services.

     Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For warrant-based derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative instruments. To the extent that the initial fair values of the freestanding and/or bifurcated derivative instrument liabilities exceed the total proceeds received, an immediate charge to income is recognized, in order to initially record the derivative instrument liabilities at their fair value.

     The discount from the face value of debt or equity instruments resulting from allocating some or all of the proceeds to the derivative instruments, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to income, usually using the effective interest method.

10


     The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. If reclassification is required, the fair value of the derivative instrument, as of the determination date, is reclassified. Any previous charges or credits to income for changes in the fair value of the derivative instrument are not reversed. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

Reclamation Costs

     The Company follows ASC 410, Asset Retirement and Environmental Obligations, which requires that an asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated asset. The cost of the tangible asset, including the initially recognized ARO, is depleted, such that the cost of the ARO is recognized over the useful life of the asset. The ARO is recorded at fair value, and accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. The fair value of the ARO is measured using expected future cash flow, discounted at the Company’s credit-adjusted risk-free interest rate. At September 30, 2012 and June 30, 2012, the Company had a reclamation obligation totaling $161,779 and $159,048, respectively.

Revenue Recognition

     Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred either physically or through an irrevocable transfer of metals to the buyer’s account, the price is fixed or determinable, no related obligations remain and collectability is probable.

     Sales of all metals products sold directly to the Company’s metals buyers, including by-product metals, are recorded as revenues upon a buyer either taking physical delivery of the metals product in the case of siliceous flux material or upon the buyer receiving all required documentation necessary to take physical delivery of the metals product in the case of concentrate (generally at the time the product is loaded onto a shipping vessel at the originating port and the bill of lading is generated).

     Revenues for metals products are recorded at current market prices at the time of delivery and are subsequently adjusted to the current market prices existing at the end of each reporting period. Due to the period of time existing between delivery and final settlement with the buyer, the Company estimates the prices at which sales will be settled. Changes in metals prices between delivery and final settlement will result in adjustments to revenues previously recorded.

     Sales of metals products are recorded net of charges from the buyer for treatment, refining, smelting losses, and other negotiated charges. Charges are estimated upon shipment of product based on contractual terms, and actual charges do not vary materially from estimates. Costs charged by smelters include a metals payable fee, fixed treatment and refining costs per ton of product.

     Sales of refined precious metals related to a definitive gold sale agreement dated September 11, 2009, and the gold and silver supply agreement dated December 23, 2011, are recorded as revenues when the buyer takes delivery. See NOTE 10 – Commitments. The recorded revenues are final at that time. Due to the nature of the agreements, an obligation exists for the delivery of refined gold and silver concurrent with the delivery of concentrate and flux products. Consequently the associated costs to purchase refined gold and silver are also recorded at the same time as the delivery of the concentrate and flux products. The costs to purchase refined gold and silver are recorded using the current market price upon delivery of the refined precious metals or upon accrual of the obligation if undelivered. If necessary the accrual for any unsettled deliveries of refined gold and silver and the related costs to purchase such are adjusted to the current market price existing at the end of each reporting period until final delivery and adjustment occurs.

11


Net Earnings (Loss) per Common Share

     Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During the periods when they are anti-dilutive, common stock equivalents, if any, are not considered in the computation. For the three months ended September 30, 2012 and 2011, the impact of outstanding stock equivalents has not been included as they would be anti-dilutive.

Comprehensive Income (Loss)

     In addition to net income (loss), comprehensive income (loss) includes all changes in equity during a period, such as cumulative unrealized changes in the fair value of marketable securities available for sale or other investments.

Stock-Based Compensation

     In connection with terms of employment with the Company’s executives and employees, the Company occasionally issues options to acquire its common stock. Awards are made at the discretion of the Board of Directors. Such options may be exercisable at varying exercise prices and generally vest over a period of six months to a year.

     The Company accounts for share based compensation on the grant date fair value of the award. The Company estimates the fair value of the award using the Black-Scholes option pricing model for valuation of the share-based payments. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow for actual exercise behavior of option holders. The simplified method is used to determine compensation expense since historical option exercise experience is limited. The compensation cost is recognized over the expected vesting period.

Reclassifications

     Certain items in these consolidated financial statements have been reclassified to conform to the current period’s presentation.

Recent Accounting Pronouncements

     In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” This pronouncement was issued to simplify how entities test for impairment of indefinite-lived intangible assets. Under this pronouncement, an entity has the option first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. In conclusion of this assessment, if an entity finds that it is not more likely than not that an indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with ASC Topic 350, “Intangibles – Goodwill and Other.” This pronouncement is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 with early adoption permitted. The adoption of this pronouncement is not expected to have a material impact on the Company’s consolidated financial statements.

     Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC during the current reporting period did not, or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

12


NOTE 3 – INVENTORY

     The following table provides the components of inventory as of:

    September 30,     June 30,  
    2012     2012  
Stockpiled ore $  6,012   $  9,268  
In-process material   -     479  
Siliceous flux material   100,066     66,206  
Precious metals concentrate   745,898     875,505  
  $  851,976   $  951,458  

NOTE 4 – ACCRUED LIABILITIES & COMPLETION GUARANTEE PAYABLE

Accrued Liabilities

     The following table provides the components of accrued liabilities as of:

    September 30,     June 30,  
    2012     2012  
Wages and benefits $  202,680   $  129,532  
Property and mining taxes   170,899     157,038  
Royalties   1,151,366     729,893  
Interest expense   82,944     85,305  
Accrued expenses   24,097     24,467  
Variable production payments   2,586,864     1,379,550  
  $  4,218,850   $  2,505,785  

     Royalty payments are incurred on the Summit project which is subject to two underlying royalty agreements and a net proceeds interest. (See NOTE 10 – Summit Silver-Gold Project). The variable production payments are incurred as a result of a definitive gold sales agreement entered into on September 11, 2009. Variable production payments are to be delivered in ounces of refined gold, and represent 1,880 ounces and 1,151 ounces due at September 30 and June 30, 2012, respectively. The obligation for the period is recorded in costs applicable to sales and calculated by netting the sales price of $400 per ounce against the current market price at the end of each reporting period as defined in the agreement. (See NOTE 10 - Commitments).

Completion Guarantee Payable

     In accordance with the completion guarantee provision under the definitive gold sale agreement (“the Agreement”), the Company has recorded an obligation at September 30, 2012 and June 30, 2012 totaling $3,359,873, which is related to the percentage of underproduction of gold produced relative to the amount of gold planned to have been produced, as set out in the Agreement. Prior to the calculation of the completion guarantee test, the Company recorded deferred revenue resulting from an upfront cash deposit received as part of the Agreement. Based upon the provisions of the Agreement, the completion guarantee test directly reduces any remaining amounts of deferred revenue dollar for dollar at the time of the calculation. Therefore in connection with the completion guarantee test, the remaining balance of deferred revenue totaling $2,855,824 at the time of the calculation was reclassified into the completion guarantee payable at June 30, 2012. Additional fees associated with the transaction totaling $504,049 were also recognized in Other Expenses and accrued as part of the completion guarantee payable at June 30, 2012. Consequently, deferred revenue was reduced to zero at June 30, 2012. (See NOTE 10 – Commitments).

13


NOTE 5- DERIVATIVE INSTRUMENT LIABILITIES

     On July 31, 2012, the Company entered into an agreement for investment banking services. In connection with the agreement the Company issued 4,500,000 warrants to purchase common stock at an exercise price of $0.40 per share. The warrants are exercisable immediately after issuance and will expire five years from the date of issuance. The warrants contain a ratchet provision to adjust the exercise price in certain circumstances. Using the Black-Scholes option pricing model, the fair market value of the warrants at the time of issuance was determined to be $927,450 with the following assumptions: risk-free rate of interest of 0.60%, expected life of 5.0 years, expected stock price volatility of 82.19%, and expected dividend yield of zero.

     On August 17, 2012, the warrant exercise price of $0.35 per share, previously reduced on June 29, 2012, on 6,750,000 warrants related to the 7% Senior Secured Convertible Debentures, was reduced to $0.30 under the terms and conditions of the warrant with the reduction resulting from the placement of the unit offering to stockholders. The warrants contain a repricing provision for anti-dilution.

     On August 17, 2012, the warrant exercise price of $0.98 per share, previously reduced on June 29, 2012, on 500,000 warrants related to the June 2, 2011 warrant issuance was reduced to $0.91 under the terms and conditions of the warrant with the reduction resulting from the placement of the unit offering to stockholders. The warrants contain a repricing provision for anti-dilution.

     On August 17, 2012, the warrant exercise price of $0.35 per share, previously reduced on June 29, 2012, on 919,448 warrants related to the additional investment rights issues of January 9, April 30, and June 2, 2008, was reduced to $0.30 under the terms and conditions of the warrant with the reduction resulting from the placement of the unit offering to stockholders. The original warrant contained an anti-dilution provision and the warrants were increased by 153,242 to 1,072,690.

     On September 14, 2012, the Company entered into an agreement for financial advisory services. In connection with the agreement the Company issued 500,000 warrants to purchase common stock at an exercise price of $0.40 per share. The warrants are exercisable immediately after issuance and will expire five years from the date of issuance. The warrants contain a ratchet provision to adjust the exercise price in certain circumstances. Using the Black-Scholes option pricing model, the fair market value of the warrants at the time of issuance was determined to be $116,650 with the following assumptions: risk-free rate of interest of 0.72%, expected life of 5.0 years, expected stock price volatility of 77.99%, and expected dividend yield of zero.

     The fair market value of the derivative instruments liabilities at September 30, 2012, was determined to be $2,922,997 with the following assumptions: (1) risk free interest rate of 0.06% to 0.61%, (2) remaining contractual life of 0.08 to 4.96 years, (3) expected stock price volatility of 66.6% to 120.4%, and (4) expected dividend yield of zero. Based upon the change in fair value, the Company has recorded a loss on derivative instruments for the three months ended September 30, 2012, of $852,132 and a corresponding increase in the derivative instruments liability.

    Derivative     Derivative     Derivative Gain  
    Liability as of     Liability as of     (Loss) Through  
    September 30, 2012     June 30, 2012     September 30, 2012  
Convertible Debentures:                  
   Purchase Agreement Warrants $ 2,922,997   $ 1,026,765   $ (1,896,232 )
                   
  Amount allocated to warrants at inception     1,044,100  
              $ ( 852,132 )

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NOTE 6 – CONVERTIBLE NOTES PAYABLE AND DEBENTURES

Convertible Senior Subordinated Notes

     On October 30, 2007, the Company completed the placement of 10% Senior Subordinated Convertible Notes of $450,000. The notes were placed with three accredited investors for $150,000 each. The notes have a term of 60 months, and at such time all remaining principal and interest shall be due. The notes bear interest at 10% per annum. Interest initially accrued for 18 months from the date of closing. Interest on the outstanding principal balance is then payable in quarterly installments commencing on the first day of the 19th month following closing. In connection with the transaction, the Company issued a five year warrant for each $2.50 invested, for a total of 180,000 warrants, each warrant giving the note holder the right to purchase one share of common stock at a price of $1.25 per share. At the option of the holders of the convertible notes, the outstanding principal and interest is convertible at any time into shares of the Company’s common stock at conversion price of $1.25 per share. The notes will be automatically be converted into common stock if the weighted average closing sales price of the stock exceeds $2.50 per share for ten consecutive trading days. The shares underlying the notes and warrants will be registered on request of the note holders, provided the weighted average closing price of the stock exceeds $1.50 per share for ten consecutive trading days.

     At September 30, 2012 and June 30, 2012, the outstanding balance on the Senior Subordinated Convertible Notes, was $450,000.

     The components of the convertible notes payable are as follows:

September 30, 2012   Principal     Unamortized        
    Amount     Discount     Net  
Current portion $ 450,000   $  (1,703 ) $  448,297  
Long-term portion, net of current   -     -     -  
  $ 450,000   $  (1,703 ) $  448,297  

June 30, 2012   Principal     Unamortized        
    Amount     Discount     Net  
Current portion $  450,000   $  (5,564 ) $  444,436  
Long-term portion, net of current   -     -     -  
  $  450,000   $  (5,564 ) $  444,436  

NOTE 7 – SENIOR SECURED GOLD STREAM CREDIT AGREEMENT

     On December 23, 2011, the Company and its subsidiaries entered into a Senior Secured Gold Stream Credit Agreement (the “Credit Agreement”) with Waterton Global Value, L.P. (“Waterton”). The Credit Agreement provides for two $10 million tranches and a $5 million revolving working capital facility. On December 23, 2011, the Company closed the first $10 million tranche of the Credit Agreement. The second $10 million tranche was earmarked to fund the strategic acquisition of Columbus Silver and was not drawn down due to the expiration of the Columbus Silver acquisition agreement.

     Proceeds from the initial $10 million tranche of the Credit Agreement were used to retire the Company’s $5 million, 15% Senior Secured Bridge loan with Victory Park Capital Advisors, LLC, in addition to the payment of transaction fees and expenses. The Company is utilizing the remaining net proceeds for operations, including but not limited to, working capital for the Summit silver-gold project.

     The Credit Agreement provides for a 9% coupon and the initial $10 million tranche amortizes over a 12-month term with the first payment due July 31, 2013. The outstanding amounts owed for the Senior Secured Gold Stream Credit Agreement are aggregated with Notes Payable for financial statement presentation. (See NOTE 8). In connection with the transaction, the Company entered into a gold and silver sale agreement (the “Gold and Silver Supply Agreement”) to sell the gold and silver originating from the Summit property to Waterton (See NOTE 10 – Summit Silver-Gold Project).

15


     Pursuant to a series of guarantees, security agreements, deeds of trust, a mortgage and a stock pledge agreement, the senior obligations are secured by a first priority lien on the stock of the Company’s subsidiaries and on liens covering substantially all of the Company’s assets, with the exception of the Ortiz gold project, including the Summit silver-gold project, the Black Canyon mica project and the Planet micaceous iron oxide project. Existing creditor, Sandstorm Gold (Barbados) Ltd., executed an intercreditor agreement that provides for subordination of its security interests in favor of Waterton.

     The Credit Agreement calls for a fee of 1.5% of the gross amount borrowed to each of Global Hunter Securities and Source Capital Group, Inc. who are registered broker dealers and members of FINRA and SIPC. The fees are to be paid half upon closing of the first tranche of $10,000,000 and half upon closing of the second tranche of $10,000,000. No fees are payable in connection with the revolving credit facility of $5,000,000. Fees aggregating $300,000 were paid in relation to the closing of the first tranche.

NOTE 8 – NOTES PAYABLE

     On June 5, 2008, the Company agreed to exercise the option to purchase the Planet MIO property, consisting of thirty-one patented mining claims totaling 523 acres in La Paz County, Arizona. The Company originally leased the property in 2000 from New Planet Copper Mining Company under the terms of a Lease with Option to Purchase. The Company agreed to exercise the purchase option in connection with settlement of an action the Company commenced in March 2007 seeking to confirm that the lease remained in good standing. The purchase price was $250,000. The Company signed a promissory note for $200,000 with interest payable at 10% per annum from the date of closing of the transaction. The original provisions of the note called for a $50,000 payment at the signing of the note, which occurred in August 2008, and four subsequent principal payments of $50,000 plus interest due each anniversary date of the agreement. In August 2009, the amortization schedule of the note was amended to reflect four equal annual payments of principal and interest of $63,094. The due date for the first annual payment was extended with the interest rate increased to 20% per annum during the extension period. The Company also agreed to pay an additional $2,000 in legal and miscellaneous fees to document the amendment. On September 10, 2012, the Company executed an amendment to extend the final payment due on the New Planet Copper Mining promissory note. The due date for the final annual payment was extended until November 5, 2012 with the interest rate increased to 20% per annum during the extension period. The Company also agreed to pay an additional $2,000 in legal and miscellaneous fees to document the amendment. All other provisions of the original agreement remain unchanged including the provision for a 5% royalty to be paid on any future production from the property.

     On September 30, 2009, the Company entered into an installment sales contract for $16,825 to purchase certain equipment. The term of the agreement is for 36 months at an interest rate of 9.25%, with the equipment securing the loan.

     On August 2, 2011, the Company entered into a financing agreement for a $5 million senior secured loan for working capital. The loan bears interest at 15% per annum payable in monthly installments in arrears. The loan is due six months from the anniversary date of the loan and the loan may be repaid at any time without penalty. The senior obligations are secured by a first priority lien on the stock of the Company’s subsidiaries and first priority liens covering substantially all of the assets of the Company, including the Summit silver-gold project, the Black Canyon mica project and the Planet micaceous iron oxide project. In connection with the loan, the Company issued warrants to purchase 500,000 shares of its common stock. The warrants have an exercise price of $1.00 per share and a term of five years. The financing agreement was retired with proceeds from the December 23, 2011 Credit Agreement entered into by the Company.

     On September 30, 2011, the Company entered into an agreement to finance insurance premiums in the amount of $105,121 at an interest rate of 4.99% with equal payments due monthly beginning November 1, 2011 and continuing until September 1, 2012.

     On April 23, 2012, the Company entered into an installment sales contract for $150,000 to purchase certain equipment. The term of the agreement is for 12 months at an interest rate of 10.00%, with the equipment securing the loan.

     On May 8, 2012, the Company entered into an installment sales contract for $46,379 to purchase certain equipment. The term of the agreement is for 48 months at an interest rate of 5.75%, with the equipment securing the loan.

16


     On June 1, 2012, the Company entered into an installment sales contract for $593,657 to purchase certain equipment. The term of the agreement is for 48 months at an interest rate of 5.75%, with the equipment securing the loan.

     The following summarizes notes payable, including the Senior Secured Gold Stream Credit Agreement, at September 30, 2012 and June 30, 2011:

    September 30,     June 30, 2012  
    2012        
             
Note payable for mineral property,
          interest at 10%, payable in 4 annual installments 
          of $63,094, including interest through August 2012; 
          Note extended on August 4, 2012 with an interest rate 
          of 20% and a due date of November 5, 2012.
$  57,358   $  57,358  
             
Installment sales contract on equipment, 
          interest at 9.25%, payable in 36 monthly installments 
          of $537, including interest through October 2012.
  --     1,598  
             
Installment sales contract on equipment, 
          interest at 10.0%, payable in 12 monthly installments 
          of $13,073, including interest through July 2013.
  114,235     150,000  
             
Installment sales contract on equipment, 
          interest at 5.75%, payable in 36 monthly installments 
          of $1,406, including interest through June 2015.
  42,811     46,379  
             
Installment sales contract on equipment, 
          interest at 5.75%, payable in 48 monthly installments 
          of $13,874, including interest through July 2016.
  560,409     593,657  
             
Financing contract on insurance premiums, 
          interest at 4.99%, payable in 11 monthly installments 
          of $9,797, including interest through September 2012.
  --     19,472  
             
Senior Secured Gold Stream Credit Agreement, interest at 
          9% per annum, payable monthly in arrears, principal 
          payments deferred to July 2012; principal installments are 
          $425,000 for July and August 2012, $870,455 monthly for 
          September 2012 through June 2013 and $445,450 in 
          July 2013.
  9,362,500     10,000,000  
             
             
Total Outstanding Notes Payable   10,137,313     10,868,464  
Less: Current portion   (9,686,747 )   (9,931,468 )
Notes payable, net of current portion and discount $  450,566   $  936,996  

     The aggregate maturities of notes payable as of September 30, 2012, is as follows:

Year ending June 30,      
            2013 $  9,200,870  
            2014   606,253  
            2015   168,773  
            2016   161,417  
Total Outstanding Notes Payable $  10,137,313  

17


NOTE 9 – FAIR VALUE MEASUREMENTS

     Fair value accounting establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

     The Company’s financial instruments consist of marketable securities and derivative instruments which are measured at fair value on a recurring basis. Marketable securities are comprised of 1,000,000 shares of common stock of Columbus Silver Corporation which is traded on the TSX Venture Exchange (TSXV: CSC). The derivative instruments consist of certain warrant contracts. The derivatives are measured on their respective origination dates, at the end of each reporting period and at other points in time when necessary, such as modifications, using Level 3 inputs in accordance with GAAP. The Company does not report any financial assets or liabilities that it measures using Level 2 inputs. The fair value measurement of financial instruments and other assets are as follows:

    September 30, 2012     Level 1     Level 2     Level 3  
Marketable securities $  50,821   $ 50,821     ---     ---  
Value of derivative instruments liability   2,922,997     ---     ---     2,922,997  

    June 30, 2012     Level 1     Level 2     Level 3  
Marketable securities $  48,776   $ 48,776     ---     ---  
Value of derivative instruments liability   1,026,765     ---     ---     1,026,765  

NOTE 10 – CONTINGENCIES AND COMMITMENTS

Commitments

     On September 11, 2009, we entered into a definitive gold sale agreement with Sandstorm Gold Ltd. (TSX-V: SSL) (“Sandstorm”) to sell a portion of the life-of-mine gold production (but not silver production) from our Summit silver-gold mine. Under the agreement we received an upfront cash deposit of $4.0 million, plus future ongoing production payments equal to the lesser of $400 per ounce or the prevailing market price, for each ounce of gold delivered pursuant to the agreement for the life of the mine. Gold production subject to the agreement includes 50% of the first 10,000 ounces of gold produced, and 22% of the gold thereafter. We receive credit against the $4,000,000 upfront cash deposit for the difference between the market price and $400 per ounce for those gold deliveries where the prevailing market price exceeds $400 per ounce. These credits are recognized as revenue, in addition to the ongoing production payments received for gold delivered pursuant to the agreement. In certain circumstances, including failure to meet minimum production rates, interruption in production due to permitting issues and customary events of default, the agreement may be terminated. In such event, we may be required to return to Sandstorm the upfront cash deposit of $4.0 million less a credit for gold delivered up to the date of that event, which is determined using the difference between the market price and $400 per ounce for gold deliveries where the prevailing market price exceeded $400 per ounce.

18


     On March 29, 2011, the Company entered into Amendment 1 for the definitive gold sale agreement dated September 11, 2009. The amendment extended the original completion guarantee date from April 2011 to June 30, 2012. The completion guarantee test performs a calculation based upon that percentage of underproduction of gold produced relative to the amount of gold planned to have been produced as set out in the agreement. In exchange for the amended completion guarantee date, the Company agreed to deliver an additional 700 ounces of gold at equivalent sales terms over and above what is currently due under the agreement. Under the terms of the amendment the delivery of the additional gold was to be made prior to June 30, 2011.

     On June 28, 2011, the Company entered into Amendment 2 for the definitive gold sale agreement. The amendment extended the delivery date for the additional 700 ounces of gold agreed upon in Amendment 1 from June 30, 2011 until October 15, 2011. In exchange for the deferred delivery date the Company agreed to pay a per diem of 3 ounces of gold for each day the additional 700 ounces of gold under Amendment 1 remain outstanding past June 30, 2011 until the actual date of delivery, no later than October 15, 2011. Based upon the sale terms of the agreement, the Company recorded an accrued liability of $773,850 based upon the closing gold price on June 30, 2011. On August 9, 2011 the Company satisfied the requirements of Amendment 2 and delivered 817 ounces of gold. The net cost of delivering the gold after receiving payment from Sandstorm of $400 per ounce delivered was $1,075,785. In order to recognize the final cost of delivering the gold, the accrued liability of $773,850 at June 30, 2011 was adjusted by an additional $301,935 and recognized during the quarter ended September 30, 2011 as costs applicable to sales.

     At June 30, 2012, the Company calculated the completion guarantee payable provided by Amendment 1. Accordingly, the Company has recorded an obligation totaling $3,359,873 at September 30, 2012 and June 30, 2012. Based upon the provisions of the agreement, the completion guarantee payment reduces any remaining amounts of deferred revenue dollar for dollar at the time of the calculation. Deferred revenue at the time of the calculation was $2,855,824, and consequently the amount of deferred revenue was reclassified to completion guarantee payable at June 30, 2012. An expense of $504,049 was recognized in other expenses for the year ended June 30, 2012, representing the difference between the completion guarantee liability of $3,359,873 at June 30, 2012 and the deferred revenue of $2,855,824 at the time of the completion guarantee payable calculation.

On December 23, 2011, the Company and its subsidiaries entered into a Senior Secured Gold Stream Credit Agreement (the “Credit Agreement”) with Waterton Global Value, L.P. (“Waterton”). The Credit Agreement provides for two $10 million tranches and a $5 million revolving working capital facility. On December 23, 2011, the Company closed the first $10 million tranche of the Credit Agreement. The second $10 million tranche, which is subject to several funding conditions, is earmarked to fund the strategic acquisition of Columbus Silver. The acquisition of Columbus Silver did not occur and consequently the second tranche was not drawn down. As part of the transaction, the Company has agreed pursuant to a gold and silver sale agreement (the “Gold and Silver Supply Agreement”) to sell refined gold and silver to Waterton for the life the Summit mine. Gold and silver subject to the agreement includes all gold and silver originating from the Summit property that is not otherwise committed to delivery to and purchased by Sandstorm Gold, Ltd, pursuant to the September 9, 2011 definitive gold sale agreement. The sales price for refined gold and silver is based upon a formulation which considers the London Bullion Market Association (“LBMA”) PM fix settlement price for each respective metal, less a discount of three percent for each metal, and a transaction cost of $1.75 per ounce for gold and $0.07 per ounce for silver. The discount on gold and silver is only applicable until and ceases after the later of either, three years after all outstanding amounts due under the Senior Secured Gold Stream Credit Agreement have been repaid, or the date on which the Company.

Summit Silver-Gold Project

     The Summit project is subject to two underlying royalties and a net proceeds interest as follows: (1) a 7.5% royalty on net smelter returns toward an end price of $1,250,000; (2) a 5% royalty on net smelter returns toward an end price of $4,000,000 less any amount paid under the royalty described in (1); and (3) a net proceeds interest of 5% of net proceeds from sales of unbeneficiated mineralized rock until such time as the royalties described in (1) and (2) have been satisfied, and 10% of such net proceeds thereafter toward an end price of $2,400,000. The Summit silver-gold project is subject to a property identification agreement between the Company and President and Chief Executive Officer. The property identification agreement specifies that a 1% royalty be paid on the value of future production from the project.

19


NOTE 11- STOCKHOLDERS’ EQUITY

Issuances of Common Stock

     On August 18, 2012, the Company issued 6,244,286 shares of common stock pursuant to a unit offering to existing shareholders under shelf registration statement on Form S-3 and received net proceeds of $1,873,261. On July 6, August 1 and August 15, 2012, in relation to the unit offering to stockholders, we filed Current Reports on Form 8-K.

     On August 3, 2012, the Company issued to a consultant 150,000 shares of common stock for investor relations services valued at $39,000 based on the closing market price on the date of the transaction.

Issuances of Options

     During the three months ended September 30, 2012, 100,000 options were cancelled and 100,000 options expired.

     On August 20, 2012, the Company granted 100,000 five-year options at an exercise price of $0.32 per share to a new outside director, the closing price on the date of grant. The options will vest on August 20, 2013. The options were valued at $16,189 using the Black-Scholes option pricing model. The options were valued using the following significant assumptions: a risk free interest rate of 0.38%, expected life of 2.75 years, stock price volatility of 82.01% and expected dividend yield of zero. Stock-based compensation of $3,539 was recorded during the quarter ended September 30, 2012 and $12,650 will be reported over the remaining vesting period.

     On August 20, 2012, the Company granted a five-year option to four key employees to purchase 400,000 shares of common stock at an option exercise price of $0.32 per share, the closing price on the date of grant. The options will vest on February 20, 2013. The options were valued at $64,755 using the Black-Scholes option pricing model. The options were valued using the following significant assumptions: a risk free interest rate of 0.38%, expected life of 2.75 years, stock price volatility of 82.01% and expected dividend yield of zero. Stock-based compensation of $14,154 was recorded during the quarter ended September 30, 2012 and $50,601 will be reported over the remaining vesting period.

Issuances of Warrants

     On September 14, 2012, the Company entered into an agreement for financial advisory services to be provided over a period of six months and requiring the issuance of 500,000 warrants exercisable at $0.40 per share with an exercise period of 5.0 years for investor relations services. The warrants are exercisable upon execution of the agreement and contain a ratchet provision to adjust the exercise price in certain circumstances. Using the Black-Scholes option pricing model, the initial fair market value for the warrants upon execution of the agreement was determined to be $116,650 with the following assumptions: risk-free rate of interest of 0.72%, expected life of 5 years, expected stock price volatility of 77.99%, and expected dividend yield of zero. This amount is being reported as stock compensation over the period of the agreement and $9,561 has been expensed for the quarter ended September 30, 2012, with $107,089 remaining as unreported stock compensation and will be reported over the remaining period of the agreement.

     On August 17, 2012, the warrant exercise price of $0.35 per share on 919,448 warrants related to the additional investment rights issues of January 9, April 30, and June 2, 2008, was reduced to $0.30 under the terms and conditions of the warrant with the reduction resulting from the issuance of stock in connection under a unit offering to existing shareholders under a shelf registration. The original warrants contained an anti-dilution provision and the warrants were increased by 153,242 to 1,072,690.

     On August 17, 2012, the Company issued 6,244,286 three year warrants at an exercise price of $0.40 and exercisable immediately. The warrants are issued pursuant to terms of the unit offering to existing shareholders under shelf registration statement.

20


     On July 31, 2012, the Company entered into a one year agreement for investment banking services. In connection with the agreement the Company issued 4,500,000 five year warrants to purchase common stock at an exercise price of $0.40 per share. The warrants are exercisable immediately and contain a ratchet provision to adjust the exercise price in certain circumstances. Using the Black-Scholes option pricing model, the initial fair market value for the warrants upon execution of the agreement was determined to be $927,450 with the following assumptions: risk-free rate of interest of 0.60%, expected life of 5 years, expected stock price volatility of 82.19%, and expected dividend yield of zero. This amount is being reported as stock compensation over the period of the agreement and $154,999 was expensed for the quarter ended September 30, 2012, with $772,451 remaining as unreported stock compensation and will be reported over the remaining period of the agreement.

     Stock option and warrant activity, both within the 1989 stock Option Plan and the 2007 Equity incentive Plan and outside of these plans, for the three months ended September 30, 2012, are as follows:

    Stock Options     Stock Warrants  
          Weighted           Weighted  
          Average           Average  
          Exercise           Exercise  
    Shares     Price     Shares     Price  
Outstanding at June 30, 2012   8,140,000   $ 0.53     14,729,107   $ 0.90  
   Granted   500,000   $ 0.32     11,397,528   $ 0.40  
   Canceled   (100,000 ) $ 0.94     ---     ---  
   Expired   (100,000 ) $ 0.46     ---     ---  
   Exercised   ---     ---     ---     ---  
Outstanding at September 30, 2012   8,440,000   $ 0.52     26,126,635   $ 0.67  

     Stock options and warrants exercisable at September 30, 2012, are as follows:

Outstanding and Exercisable Options     Outstanding and Exercisable Warrants  
                Weighted                             Weighted        
                Average                             Average        
                Contractual     Weighted                       Contractual     Weighted  
Exercise               Remaining     Average     Exercise                 Remaining     Average  
Price   Outstanding     Exercisable     Life     Exercise     Price     Outstanding     Exercisable     Life     Exercise  
Range   Number     Number     (in Years)     Price     Range     Number     Number     (in Years)     Price  
$0.11   4,000,000     4,000,000     1.02   $0.11   $0.30     7,822,690     7,822,690     2.01   $0.30  
$0.32   500,000     --     4.89   $0.32   $0.32     11,244,286     11,244,286     4.87   $0.40  
$0.55   175,000     175,000     0.25   $0.55   $0.91     500,000     500,000     3.84   $0.91  
$0.60   605,000     605,000     1.18   $0.60   $1.00     600,000     600,000     4.11   $1.00  
$0.86   750,000     750,000     2.69   $0.86   $1.06     253,773     253,773     1.78   $1.06  
$0.88   50,000     50,000     3.42   $0.88   $1.25     464,858     464,858     1.32   $1.25  
$0.94   350,000     350,000     4.28   $0.94   $1.50     933,334     933,334     3.13   $1.50  
$0.95   75,000     75,000     4.26   $0.95   $1.625     461,539     461,539     2.25   $1.625  
$1.00   250,000     125,000     2.54   $1.00   $1.70     3,846,155     3,846,155     2.31   $1.70  
$1.01   715,000     715,000     3.63   $1.01                                
$1.03   250,000     250,000     4.45   $1.03                                
$1.165   20,000     20,000     1.63   $1.165                                
$1.21   150,000     150,000     3.25   $1.21                                
$1.30   125,000     125,000     0.58   $1.30                                
$1.30   150,000     150,000     1.11   $1.30                                
$1.38   150,000     150,000     2.25   $1.38                                
$1.70   125,000     125,000     0.58   $1.70                                
    8,440,000     7,940,000                       26,126,635     26,126,635              
                                                       
Outstanding Options           1.99   $0.52     Outstanding Warrants     3.40   $0.67  
Exercisable Options           1.81   $0.53     Exercisable Warrants     3.40   $0.67  

21


     As of September 30, 2012, the aggregate intrinsic value of all stock options and warrants vested and expected to vest was approximately $1,982,269 and the aggregate intrinsic value of currently exercisable stock options and warrants was approximately $1,942,269. The intrinsic value of each option share is the difference between the fair market value of the common stock and the exercise price of such option or warrant share to the extent it is "in-the-money". Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the quarter and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation is based on the $0.40 closing stock price of the Common Stock on September 30, 2012. The total number of in-the-money options and warrants vested and exercisable as of September 30, 2012, was 11,822,690.

     The total intrinsic value of options and warrants exercised during the three months ended September 30, 2012, was $0.00.

     The total fair value of options and warrants granted during the three months ended September 30, 2012, was approximately $2,026,663. The total grant-date fair value of option and warrant shares vested during the three months ended September 30, 2012, was approximately $2,078,045.

NOTE 12 – SUBSEQUENT EVENTS

     The Company has evaluated events and transactions that occurred subsequent to September 30, 2012 for possible disclosure or recognition in the consolidated financial statements. The Company has determined that there were no such events or transactions that warrant disclosure or recognition in the consolidated financial statements, except as set forth below.

     On October 22, 2012, the Company closed the Mogollon Option Agreement with Columbus Silver Corporation following approval of the agreement by the TSX Venture Exchange. Under the agreement, the Company may acquire the Mogollon Project, Catron County, New Mexico, for payments aggregating $4,500,000 scheduled to be paid through the end of 2014. The Company paid an initial $100,000 upon the signing of the agreement and $150,000 upon approval of the agreement by the TSX Venture Exchange. The payment schedule also calls for an additional $500,000 to be paid on or before December 30, 2012, and four payments of $937,500 each on June 30, 2013, December 30, 2013, June 30, 2014, and December 30, 2014. Additionally, the Company must maintain the property in good standing by paying underlying claim and lease payments.

     On October 11, 2012, the Company announced signed a Binding Heads of Agreement to pursue a business combination with International Goldfields Limited (ASX: IGS). Key terms of the transaction have been approved by the boards of directors of both companies, subject to satisfactory completion of due diligence, definitive agreements, regulatory and required consents and approvals. The companies are targeting prompt execution of definitive documents and a first quarter 2013 closing date, subject to shareholder approvals and other customary closing conditions. The contemplated transaction structure would be affected solely through an exchange of SFEG shares for IGS shares in connection with a merger transaction.

Key terms of the Heads of Agreement include, among others, that:

  • Existing SFEG and IGS shareholders will own 61.57% and 27.11%, respectively, of the outstanding shares of the combined company’s common stock, assuming completion of an a $5.0 million placement in connection with the merger;
     
  • The IGS board will be restructured to comprise four directors nominated by Santa Fe and one director nominated by International Goldfields;
     
  • The merged company will continue trading on the ASX and will apply for a listing to trade ADRs on a major US exchange; and
     
  • On completion of the merger, IGS must have (a) a minimum of $10.0 million in available cash and liquid assets and (b) a maximum of $100,000 in total indebtedness, both in Australian currency.

     IGS has also agreed to advance the Company $4.0 million AUD by way of a convertible note secured by the Company’s interest in its rights to the Mogollon property option. The Company has received nearly the entire amount of the advance to date.

22


     On October 9, 2012, the Company entered into the First Amendment to the Senior Secured Gold Stream Credit Agreement which modifies the due dates of certain principal payments on the note. The amendment calls for principal payments of $1,082,955 in October 2012, $500,000 in November 2012, $0 in December 2012 and January 2013, and $3,852,275 in February 2013. All other principal payments remain unchanged and interest payments will continue to be due monthly. The revised payments for October and November 2012 have already been paid by the Company.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

     This Form 10-Q may contain certain “forward-looking” statements as such term is defined in the private securities litigation reform act of 1995 and by the securities and exchange commission in its rules, regulations and releases, which represent the Company’s expectations or beliefs, including but not limited to, statements concerning the Company’s operations, economic performance, financial condition, growth and acquisition strategies, investments, and future operational plans. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “will”, “expect”, “believe”, “anticipate”, “intent”, “could”, “estimate”, “might”, “Plan”, “predict” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company’s control, and actual results may differ materially depending on a variety of important factors, including uncertainty related to acquisitions, governmental regulation, managing and maintaining growth, the operations of the company and its subsidiaries, volatility of stock price and any other factors discussed in this and other registrant filings with the securities and exchange commission. The company does not intend to undertake to update the information in this Form 10-Q if any forward-looking statement later turns out to be inaccurate.

     The following discussion summarizes the results of our operations for the three month period ended September 30, 2012, and compares those results to the three month period ended September 30, 2011. It also analyzes our financial condition at September 30, 2012. This discussion should be read in conjunction with the Management’s Discussion and Analysis, including the audited financial statements for the years ended June 30, 2012, 2011 and 2010 and Notes to the audited financial statements, in our Form 10-K for our fiscal year ended June 30, 2012.

Overview

     Santa Fe Gold Corporation (“the Company”, “our” or “we”) is a U.S. mining company, incorporated in August 1991 in the state of Delaware, with a general business strategy to acquire and develop mining properties amenable to low cost production.

     The results of operations for the prior fiscal years ended reflect a continued under-capitalization of our Summit silver-gold project which requires additional funding to be able to achieve full project performance and sustained profitability. We expect results of operations in fiscal 2013 to reflect improved performance of the Summit mine. However, there is significant uncertainty in our Summit estimates of both future costs and future revenues, and we require additional capital resources to complete our plans.

     We are continuing to increase sales each quarter. Sales for the quarter ended September 30, 2012 increased to $5,880,297 as compared to sales for the quarter ended June 30, 2012 of $3,387,357, an increase of $2,492,940 and related accounts receivable increased $2,857,979 at September 30, 2012.

     We are dependent on additional financing to continue our exploration efforts in the future and if warranted, to develop and commence mining operations. While we have no current plans or arrangements for this additional capital requirement, we anticipate that we will be seeking additional equity financings or other means of financing in the future.

23


     We anticipate a need for at least $24.0 million over the next 12 months, and $33.0 million over the next 36 months in order to satisfy past commitments, pay corporate overhead costs, complete Summit development, and fund acquisitions, feasibility studies and exploration programs as discussed under the Liquidity and Capital Resources section of this report. A portion of the required funding may be generated from cash flows from our Summit mine. If we fail to procure adequate funding on acceptable terms, we may be required to reduce or eliminate substantially all business activities until such time as funding can be secured on a basis acceptable to us.

Basis of Presentation and Going Concern

     The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due.

     The consolidated unaudited financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Should we be unable to continue as a going concern, we may be unable to realize the carrying value of our assets and to meet our obligations as they become due.

     We have a total accumulated deficit of $66,388,709 at September 30, 2012. To continue as a going concern, we are dependent on continued fund raising. However, we have no commitment from any party to provide additional capital and there is no assurance that such funding will be available when needed, or if available, that its terms will be favorable or acceptable to us.

     The Company has increased revenue-generating operations during the current three months. To continue as a going concern, the Company is dependent on continued fund raising for project development and payment of general and administration expenses until production at the Summit mine and related precious metal sales are sufficient to fund our consolidated operations. The Company, other than its current financing facilities, has no additional commitment from any party to provide additional working capital should it been required.

     The Company’s consolidated unaudited financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Liquidity and Capital Resources; Plan of Operation

     As of September 30, 2012, we had cash and cash equivalents of $261,566 as compared to $614,385 at June 30, 2012 and we had accounts receivable of $5,300,378 at September 30, 2012 as compared to $2,442,399 at June 30, 2012. As of September 30, 2012, we had a working capital deficit of $16,074,302.

     In August 2012, we raised $1,873,261 under a unit offering to existing stockholders, with each unit consisting of one share of common stock and one warrant to purchase an additional share of common stock. Each unit was sold at a price of $0.30. Each warrant has an exercise price of $0.40 per share of common stock and is exercisable for a period of three years. The Company issued 6,244,286 shares of common stock and 6,244,286 warrants pursuant to the unit offering. These securities have been registered on our registration statement on Form S-3.

     On October 22, 2012, the Company closed the Mogollon Option Agreement with Columbus Silver Corporation following approval of the agreement by the TSX Venture Exchange. Under the agreement, the Company may acquire the Mogollon Project, Catron County, New Mexico, for payments aggregating $4,500,000 scheduled to be paid through the end of 2014. The Company paid an initial $100,000 upon the signing of the agreement and $150,000 upon approval of the agreement by the TSX Venture Exchange. The payment schedule also calls for an additional $500,000 to be paid on or before December 30, 2012, and four payments of $937,500 each on June 30, 2013, December 30, 2013, June 30, 2014, and December 30, 2014. Additionally, the Company must maintain the property in good standing by paying underlying claim and lease payments. The Mogollon Project encompasses most of the Mogollon district in southwest New Mexico, which has substantial recorded historical production of silver and gold. The acquisition is anticipated to assist in our strategic objective of developing new ore sources to augment ore currently processed through our flotation mill at Lordsburg.

24


     On October 11, 2012, the Company announced it signed a Binding Heads of Agreement to pursue a business combination with International Goldfields Limited (ASX: IGS). Key terms of the transaction have been approved by the boards of directors of both companies, subject to satisfactory completion of due diligence, definitive agreements, regulatory and required consents and approvals. The companies are targeting prompt execution of definitive documents and a first quarter 2013 closing date, subject to shareholder approvals and other customary closing conditions. The contemplated transaction structure would be affected solely through an exchange of SFEG shares for IGS shares in connection with a merger transaction.

Key terms of the Heads of Agreement include, among others, that:

  • Existing SFEG and IGS shareholders will own 61.57% and 27.11%, respectively, of the outstanding shares of the combined company’s common stock, assuming completion of an a $5.0 million placement in connection with the merger;
     
  • The IGS board will be restructured to comprise four directors nominated by Santa Fe and one director nominated by International Goldfields;
     
  • The merged company will continue trading on the ASX and will apply for a listing to trade ADRs on a major US exchange; and
     
  • On completion of the merger, IGS must have (a) a minimum of $10.0 million in available cash and liquid assets and (b) a maximum of $100,000 in total indebtedness, both in Australian currency.

     We believe that the proposed business combination will maximize collective shareholder value for numerous reasons, including a strengthened balance sheet, with significantly improved liquidity, is anticipated to reduce our project debt levels, and provide capital to further develop our new Mogollon project and advance our Ortiz project. The merged entity will be managed by an expanded management team with complementary experience in exploration, development, operations, and financing and with anticipated trading on both the ASX and a major United States exchange should increase the combined company’s visibility in the investor and financial marketplace.

Derivative Financial Instruments

     In connection with the issuance of debt or equity instruments, we may issue options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances, may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.

     The identification of, and accounting for, derivative instruments is complex. Our derivative instrument liabilities are revalued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur. For warrants that are accounted for as a derivative instrument liability, we determined the fair value of these warrants using the Black-Scholes option pricing model. That model requires assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the warrants. The identification of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our consolidated financial statements.

RESULTS OF OPERATIONS

Operating Results for the Three Months Ended September 30, 2012 and 2011

     Sales

     Sales increased to $5,880,297 for the three months ended September 30, 2012, from $2,550,724 for the three months ended September 30, 2011, an increase of $3,329,573. We achieved full commercial production at the Summit Mine during the previous quarter which contributed to the large increase over the prior comparable period. The increase is comprised primarily of precious metals sales of concentrate and flux material.

25


     Concentrate and flux sales for the three months ended September 30, 2012 were $5,578,654, as compared to $1,633,339 for the three months ended September 30, 2011, an increase of $3,945,315 or 242%. The increase is due to the production of approximately 21,000 additional tons and an additional 998 ounces of gold and 45,155 ounces of silver over the prior comparable period.

     Sales of refined gold decreased to $301,643 for the three months ended September 30, 2012, as compared to $917,385 for the three months ended September 30, 2011, a decrease of $615,742. Sales of refined gold for the current period relate solely to the Waterton commodity supply agreement. Obligations relating to the sales of refined gold to Sandstorm for the current period were not delivered and deliveries under the definitive gold sales agreement are anticipated to resume in January 2013. The related costs to purchase the refined gold have been recorded in cost of sales and the corresponding liability accrued in the current period.

     Costs Applicable to Sales

     Costs applicable to sales, including related costs for concentrate, flux material, and refined gold and silver generated for the three months ended September 30, 2012 were $4,435,856, compared to $1,620,490 for the three months ended September 30, 2011, an increase of $2,815,366.

     Costs applicable to sales for concentrate and flux material increased to $2,899,741 for the three months ended September 30, 2012 compared to $527,080 for the three months ended September 30, 2011, an increase of $2,372,661. The increase for concentrate and flux costs is directly related to the increased production of both products.

     Total costs applicable to sales of refined gold were $1,536,115 for the three months ended September 30, 2012, and $1,093,410 for the three months ended September 30, 2011, an increase of $442,705. The increase is directly related to the increase in sales for concentrate and flux material and the corresponding requirements to deliver refined precious metals in conjunction with the Sandstorm definitive gold sales agreement and the Waterton commodity supply agreement. Estimated costs to purchase refined gold are accrued at the same time as the delivery of concentrate and flux products even though final sale of the refined gold may occur at a later date. Additionally, amendments #1 and #2 of the definitive gold sales agreement required the delivery of additional ounces of gold to Sandstorm for the extension of the completion guarantee test date and accounted for $-0- and $301,935 in costs applicable to sales for the three months ended September 30, 2012 and September 30, 2011, respectively.

     Exploration

     Exploration, mine and mill start up costs were $595,817 for the three months ended September 30, 2012, as compared to $528,954 for the three months ended September 30, 2011, an increase of $66,863. The increase in costs is primarily comprised of royalties and resource taxes of $227,154. These increases were mainly offset by a decrease in vehicle operating costs, repairs and maintenance, and general expenses aggregating $188,577.

     General and Administrative

     General and administrative expenses decreased to $774,042 for the three months ended September 30, 2012, from $963,124 for the comparative three month period ended September 30, 2011, a change of $189,082. The change is mainly attributable to a decrease in legal fees of $79,494; and a loss on equipment of $152,287 in the prior comparable period. These decreases were offset primarily by an increase audit fees recorded during the current period of $58,488.

     Depreciation and Amortization

     Depreciation and amortization expense increased to $1,085,344 for the three months ended September 30, 2012, as compared to $658,407 for the three months ended September 30, 2011, an increase of $426,937. The increase is attributable primarily to the amortization of mine development costs of $406,975 during the current period. Mine development costs in the prior comparable period were capitalized until the achievement of commercial production.

26


     Other Income and Expenses

     Other income and (expenses) for the three months ended September 30, 2012, were $(1,408,992) as compared to $1,925,240 for the comparable three months ended March 31, 2011. The decrease of $3,334,232 is primarily attributable to the decrease gain recognized on derivative instruments liability of $3,739,892 and an increase in interest expense of $141,576, and was offset by a decrease in accretion of discounts on notes payable of $549,985.

     The decrease in accretion of discounts on notes payable is the result of the conversion of the Sulane convertible notes and the refinancing of the Victory Park note, both of which were present in prior comparable three month period. The increase in interest expense was due primarily to interest and other financing costs associated with the ten million dollar Senior Secured Gold Stream Credit Agreement that was placed on December 23, 2011.

     Gain (Loss) on Derivative Financial Instruments

     We recognized a loss on derivative financial instruments of $(852,132) for the three months ended September 30, 2012, as compared to a gain of $2,887,760 for the prior year’s comparable period, resulting in a decreased gain of $3,793,892. The non-cash decreased gain recognized arises from adjustments to record the derivative financial instruments at fair values in accordance with current accounting standards. The decrease in the derivative gain for the three months ended September 30, 2012, is attributable mainly to adjustments to record the change in fair value for the embedded conversion feature of derivative financial instruments, the warrants previously issued under our registered direct offerings, changes in the market price of our common stock, which is a component of the calculation model, and the issuance of additional warrants resulting in derivative treatment. We use the Black-Scholes option pricing model to estimate the fair value of this derivative. Because Black-Scholes uses our stock price, changes in the stock price will result in volatility in the earnings in future periods as we continue to reflect the derivative financial instruments at fair values.

Factors Affecting Future Operating Results

     We continue to deploy our plan to place the Company on an improved financial footing. We plan to procure capital with long term financing arrangements and/or equity placements as required, and pursue strategic business combinations and acquisitions. If we continue to secure required financing on acceptable terms, we believe we will be in a position to execute our business plan on our current property sites and continue to strengthen our overall financial position.

     On October 22, 2012, we closed the Mogollon Option Agreement with Columbus Silver Corporation. Under the agreement, we may acquire the Mogollon Project, Catron County, New Mexico, for payments aggregating $4,500,000 scheduled to be paid through the end of 2014. The Mogollon Project encompasses most of the Mogollon district in southwest New Mexico. The completion acquisition will assist in our strategic objective of developing new ore sources to augment ore currently processed through our flotation mill at Lordsburg.

     We have signed a Binding Heads of Agreement to pursue a business combination with International Goldfields Limited (ASX: IGS). Key terms of the transaction have been approved by the boards of directors of both companies, subject to satisfactory completion of due diligence, definitive agreements, regulatory and required consents and approvals. The companies are targeting prompt execution of definitive documents and a first quarter 2013 closing date, subject to shareholder approvals and other customary closing conditions. The contemplated transaction structure would be affected solely through an exchange of SFEG shares for IGS shares in connection with a merger transaction. We believe that the proposed business combination will maximize collective shareholder value for numerous reasons, including a strengthened balance sheet, with significantly improved liquidity, is anticipated to reduce our project debt levels, and provide capital to further develop our new Mogollon project and advance our Ortiz project.

Off-Balance Sheet Arrangements

     During the three months ended September 30, 2012, we did not engage in any off-balance sheet arrangements defined in Item 303(a) (4) of the SEC’s Regulation S-K.

27


ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     There has been no material change in the market risks discussed in Item 7A of Santa Fe Gold’s Form 10-K for the fiscal year ended June 30, 2012.

ITEM 4 – CONTROLS AND PROCEDURES

     We maintain “disclosure controls and procedures” (as defined in Rules 13a-15(d) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and that our disclosure controls and procedures are effective in alerting management on a timely basis to material information required to be disclosed in our periodic reports. Under the supervision of, and the participation of our management, our Chief Executive Officer and Principal Financial Officer, or persons performing similar functions, has conducted an evaluation of our disclosure controls and procedures as of September 30, 2012. This evaluation included certain areas in which we have made, and are continuing to make, changes to improve and enhance controls. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by us in reports we file with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods required, and are effective in alerting management on a timely basis to material information required to be disclosed in our periodic reports.

     During the quarter ended September 30, 2012, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     None.

ITEM 1A. RISK FACTORS

     Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in our annual report on Form 10-K for our year fiscal ended June 30, 2012, in addition to the other information included in this quarterly report. If any of the risks described actually occurs, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall.

     As of September 30, 2012, there have not been any material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, although we may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

     None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None

28


ITEM 5. OTHER INFORMATION

     Mine Safety Disclosures

     The Dodd-Frank Wall Street Reform and Consumer Protection Act (“The Act”) requires the operators of mines, including gold and silver mines, to include in each periodic report filed with the Securities and Exchange Commission certain specified disclosures regarding the company’s history of mine safety.

     In evaluating these disclosures, consideration should be given to factors such as: (i) the number of citations and orders may vary depending on the size of the mine, (ii) the number of citations issued will vary from inspector to inspector and mine to mine, and (iii) citations and orders can be contested and appealed, and in that process, are often reduced in severity and amount, and are sometimes dismissed.

     Specified disclosures relating to The Act and pertaining to the Summit Mine for the three months ended September 30, 2012 are as follows:

(i)

Total number of violations of mandatory health or safety standards that could “significantly and substantially” (“S&S”) contribute to a safety or health hazard under the Federal Mine Safety and Health Act of 1977 (the “Mine Safety Act”) for which the Company received a citation from the Mine Safety and Health Administration (“MSHA”): - 14; (These are violations that could "significantly and substantially" contribute to a safety or health hazard as issued.);

   
(ii)

Total number of orders and citations issued under Section 104(b) of the Mine Safety Act (a “failure to abate”): - 1;

   
(iii)

Total number of citations and orders for unwarrantable failure to comply with mandatory health and safety standards under Section 104(b): - None;

   
(iv)

Total number of imminent danger orders under Section 107(a) of the Mine Safety Act issued to the Company: - None;

   
(v)

Total dollar value of proposed assessments from MSHA: - $7,567;

   
(vi)

Total number of mining related fatalities: - None;

   
(vii)

Mines for which the operator has received written notice of a pattern of violations or the potential to have such a pattern: - None;

   
(viii)

Pending legal action before the Mine Safety and Health Review Commission: - We have multiple citation protests pending before the Commission.

ITEM 6. EXHIBITS

(a) The following exhibits are filed as part of this report:

  31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14a and Rule 15d-14(a).

     
  31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14a and Rule 15d-14(a).

     
  32.1

Certification of Principal Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. – Section 1350.

29


SIGNATURES:

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 9, 2012 /s/ W. Pierce Carson
       W. Pierce Carson
       Chief Executive Officer, President, Director
       and Chairman of the Board
   
  /s/ Michael P. Martinez
       Michael P. Martinez
       Chief Financial Officer

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